2025 on-chain sports investigation report: Making Decentralized Finance more Decentralized Finance

Written by: Zuo Ye

Within a month, the crypto market experienced two shocks on October 11 and November 3. Whether DeFi still has a future has become a common question for everyone. At this time, it is just right to observe the current structure and changing direction of the DeFi market.

From the most macro perspective, DeFi is rapidly breaking free from the “second system effect”. The impact of stablecoins on traditional banks and the payment industry is becoming increasingly real, and the Federal Reserve's attempt to provide a streamlined main account is clear evidence of this. Institutional DeFi, represented by Aave/Morpho/Anchorage, is changing the operational model of traditional finance. Uniswap plans to turn on the fee switch, and the Perp DEX War represented by Hyperliquid is still in full swing.

The immature characteristic lies in choosing a noble death for the sake of ideals. It is far too early to talk about DeFi being completely mature; we are still in the stage of large-scale adoption. In the sky of DeFi, two dark clouds are still drifting:

Who is the ultimate lender in the entire on-chain economic system? Morgan created the Federal Reserve, so what mechanism should assume a similar role in DeFi?

Beyond the established DEX/Lending/Stable products that are continuously replicated, how should truly original DeFi tracks or mechanisms be triggered?

The price is the result of the game.

Bart, as long as you are connected to the internet, I am right by your side.

We are often blinded by the ubiquitous, and in the DeFi universe, all innovations so far revolve around DEX/Lending/Stablecoin. This is not to say that BTC/ETH are not mechanisms of innovation, nor that RWA/DAT/tokenized stocks/insurance are not innovations in assets.

Referring to the six pillars of on-chain protocols, BTC and Bitcoin essentially do not require any other assets and protocols. The DeFi we are talking about refers to projects occurring on public chains/L2 such as Ethereum/Solana. Referring to the leverage cycle of currency stocks and bonds, the selling costs of innovative assets are getting higher and higher, and the entire industry is pursuing products that have real profitability, such as Hyperliquid.

Image description: The evolution of the DeFi paradigm, image source: @zuoyeweb3

Since the end of DeFi Summer, the innovations in DeFi have been constant improvements on established products, existing assets, and established facts. For example, trading is divided into three types: spot, Perp, and Meme, which correspond to the AMM/CLOB/Bonding Curve during the DeFi Summer period. Even the most innovative Hyperliquid carries many shadows of Serum.

From the most microscopic perspective, Pendle started with the earliest fixed income products, embracing yield-bearing stablecoins such as LST/LRT and Ethena, as well as the coincidental choice of self-built lending + Swap products by Euler and Fluid. If users set yield strategies using Ethena and other YBS, it can theoretically enable the simultaneous utilization of DEX/Lending/Stablecoin across any blockchain, any protocol, and any Vault.

This synergy, while amplifying returns, has also “created” numerous liquidation disasters and crises of trust. Beyond that, there are No-Go Zones everywhere; blockchain is born free, yet is shackled everywhere.

Decentralization is a beautiful vision, but centralization is more efficient. What is poorer in the competition is the centralization of protocols. Aave is certainly large and secure, but it also means that you have fewer and newer options. In contrast, later entrants like Morpho/Euler can only embrace insecure principals and “inferior” assets.

The unbanked have sparked a chase for stablecoins in the third world. It cannot be said that Aave's prudence created the crisis for Morpho, but unAaved has also triggered a pursuit for subprime bonds, subprime protocols, and subprime managers among on-chain mice and the younger generation.

Innovation can only happen among marginalized groups, where the cost of trial and error is incredibly low, and those who survive will repeatedly challenge the established patterns. Aave V4 will also become more like its competitors, rather than its own successful past.

The protocols and their tokens that we see now, their market prices and trading volumes are merely an intuitive reflection of the current environment; in other words, they are already an acknowledgment of the results of repeated games.

It is difficult to say whether it will be effective in the future or even have any reference significance. The stablecoin chains Plasma and Stablechain are exceptionally popular, but they are almost impossible to challenge the adoption rates of Tron and Ethereum. Even xUSD's attempt to challenge USDe, which is much smaller in scale than USDT, has already been declared a failure.

Pricing systems tend to prefer time; agreements that last longer often survive longer. The success of Hyperliquid and USDe is an exceptional deviation from the norm. It is worth discussing how much market share Euler/Morpho/Fluid can capture from Aave, but it is almost impossible to replace Aave.

Image description: Crypto Gravity Well: Time Scale and Income, Image source: @zuoyeweb3

Crypto Gravity Well: Time and App Rev [Continuous] from left to right is the token issuance time, from top to bottom is Rev

Time: Balancer (hacked), Compound (dormant), Aave (thriving) captures our time

Rev: The ability to make money is the only commercial value. One is the intrinsic token value BTC (the issuance of USDT, earning stablecoins wants to take this shortcut), and the other is the value capture ability (Pump's mining and selling).

Competition is becoming more intense, burning money for growth.

As shown in the figure above, the x-axis represents the time the protocol has continued to the present, while the y-axis represents the protocol's value capture ability. Compared to indicators such as token price, trading volume, and TVL, the ability to make money is the most objective representation (Polymarket theoretically does not make a profit).

In theory, the earlier a protocol is established, the stronger its stable profitability will be. Later entrants can only enhance their own token <> liquidity <> trading volume flywheel continuously; referring to Monad/Berachain/Story, failure is more likely.

The value is the goal in balance.

One must believe in the power of the masses, but not in the wisdom of the masses.

DeFi is a movement that, relative to exchanges and TradFi, is indeed one of the best innovation cycles in history against the backdrop of overall easing, and may give birth to a new paradigm that surpasses DeFi Summer.

The exchange is under heavy pressure, and Hyperliquid's transparency has demonstrated a stronger anti-fragility than Binance for the first time. After 1103, the pace of lending and stablecoins has slowed but has not been disproven. People do indeed need subordinate bonds, as well as simple funds/bonds/equity certificates—stablecoins.

Compared to the liquidity migration restrictions imposed on CEX for market makers in 10·11, on-chain trading, spot/contract, and alternative assets are actively expanding in scale. As long as the issues can be engineered into a solution, there is a possibility of them being completely resolved.

Image description: Crypto assets: Time & Volatility, Image source: @zuoyeweb3

First Quadrant (Rookie Area): HYPE, PUMP, Public Chain /L2/Alt L1 (Monad, Berachain, MegaETH), RWA (Bond, Gold, Real Estate)

Second Quadrant (Shanzhai Area): DOGE, SOL, Compound, Pendle, Polymarket, Euler, Fluid, Morpho, Ether.Fi, Lido, No-USD Stablecoin, Option,

Third Quadrant (Industry Leaders): BTC/ETH/USDT/USDC/USDS/Aave/

Fourth Quadrant (Death Zone): ADA, Meme, DAT, Insurance

Putting numerous new assets into the rookie zone, they are sensitive to both time and volatility, essentially belonging to short-term speculative assets. Only by surpassing the simple gaming cycle and falling into a stable holder group and usage scenarios can they enter the altcoin zone, which is not particularly sensitive to time but cannot withstand drastic market fluctuations. Most projects will remain here.

Moreover, the harder the project team works, such as under measures like ve(3, buybacks, burns, mergers, renaming, etc., it may still remain here, which can be seen as a gradual uphill period; if you do not advance, you will retreat, and even striving to move forward may lead to regression.

The story after that is simple: successfully crossing the tribulation and entering a stable zone, becoming so-called assets that traverse cycles, such as BTC and ETH, and perhaps adding half a SOL and USDT. However, the vast majority of assets will slowly die off, at which point they are neither time-sensitive nor have any volatility.

Meme and DAT will exist as a track for a long time, but the assets under them are unlikely to have lasting opportunities, while a few representative assets like DOGE and XRP are outliers.

In fact, if the protocol is seen as an asset innovation, many issues will be resolved easily, that is, the goal of entrepreneurship is to sell itself once, rather than pursuing to become a continuous open system:

Spot DEX: Trading itself focuses on mainstream assets (BTC/ETH) and whale exchanges, retail investors no longer trade altcoins. The core of the project is to seek specific clients rather than becoming an unrestricted public infrastructure, such as dark pools rationalizing the information disparity between whales and retail investors.

Perp DEX: The news of significant financing is a prelude to the token issuance, and the VCs are highly differentiated. The big names resemble the TGE funding parties, while small VCs can only perish in the Perp track, and retail investors can only pick up scraps on various launchpads.

Meme: The emotion itself has become a tradable asset, and it cannot become a consensus across the entire industry. There is no indication of PumpFun's ability to solve this problem.

Platformization & modular lending: A long-term trend, lending protocols can sell their liquidity, brand, and technology in chunks, essentially following a B2B2C model.

DEX+Lending Integration Development: It is considered the latest batch in the nested doll context, and a dedicated article will be released to introduce its mechanism.

Non-dollar stablecoins / Non-pegged dollar stablecoins: Focused on developed regions such as the Euro, Japanese Yen, South Korean Won in the short term, but the long-term market can only be in the third world.

This section details the market situation of yield-bearing stablecoins. Overall, yield-bearing stablecoins are the asset form that best aligns with the integration of DEX/Lending/Stable, but they will require a massive engineering combination capability.

In contrast, there are innovative models outside of DEX/Lending/Stable, with limited observation samples for now. For example, the stablecoin NeoBank still represents a comprehensive model of the three, while prediction markets belong to the broad category of DEX. The concepts that seem promising might be Agentics and Robotics.

The Internet has brought about scalable replication, which is drastically different from the production models of the industrial era. However, there has long been no corresponding economic model. Advertising economics often comes at the expense of user experience. Compared to LLM on-chain, Agentics is at least more aligned with the technical characteristics of blockchain, namely the around-the-clock trading efficiency brought about by extreme programmability.

With the decreasing Gas Fees, along with the years of TPS improvement and ZK development, large-scale adoption of blockchain could occur in a replication economy that does not require human involvement.

The combination of robotics and cryptocurrency is not very interesting in the short term, at least until Yushu has eliminated the gimmick and educational value, it is difficult for robots to truly land in Web3. As for the long term, only heaven knows.

Conclusion

Make DeFi more DeFi.

Robotics has been too long, and clearing is a matter of urgency.

The composite liquidation mechanism of DEX+Lending is a proactive construction against the DeFi crisis, yet it could not prevent the spread of the crisis on November 3rd. The most effective response was Aave's preemptive rejection. Looking at the entire industry, how to handle liquidation and subsequently restore the market has become the biggest challenge in the industry.

In 2022, after the 3AC incident broke out, SBF actively acquired and restructured the involved protocols, and less than half a year later, FTX was also taken over by traditional law firms. After the explosion of Stream's xUSD, it was also handed over to law firms immediately.

Code is Law, it's about to become Lawyer is Coder.

Before SBF and the law firms, BTC long served as the ultimate liquidator, although it required a long time to rebuild people's trust in the on-chain economy. At least, we still have BTC.